Mainly there are 2 methods of bookkeeping and they are:
- Cash Method and
- Accrual Method
It is that method where the transactions are recorded at the time when it occurs irrespective whether the cash is realized or not. Moreover, most of the organizations prefer accrual method due to the following reasons:
- It helps accurate reporting of the owner’s equity, assets and liabilities of a company at the end of the accounting year.
- Through the accrual method, a business can generate a more practical and actual report of revenues and expenses of a company for a specific time period.
This the reason why most of the organization follow the accrual method of accounting.
Cash Method Vs Accrual Method
Here is the difference between the cash method and the accrual method
|S. No.||Accrual Method||Cash Method|
|1||Receivables are recorded as assets when they are earned.||In the cash method, receivables are not reported as assets.|
|2||In the accrual method of bookkeeping, revenues are reported at the time when they are earned.||Whereas, in this method, revenues are recorded when the cash is received.|
|3||In the accrual method of bookkeeping, payables are recorded when they are incurred.||However, payables are not recorded in the cash method of bookkeeping|
|4||Expenses are recorded when they are the best match with revenues or when they are used up.||On the contrary, the expense is recorded when they are realized in cash.|
|5||Net income is based on revenues earned and expenses incurred during an accounting year.||Net income is completely based on cash receipts and cash disbursement rather than revenues earned and expenses incurred during an accounting year.|
|6||A more accurate and realistic balance sheet is there as it contains all the assets, liabilities and owner’s equity.||The balance sheet prepared by this method is quite unrealistic as it omits some of the assets and liabilities that also impacts the owner’s equity amount.|
|7||The accrual method is accepted by GAAP||On the other hand, the cash method of accounting infringes with the matching principle of accounting|
|(Generally Accepted Accounting Principle)|
Note: Some small organizations might be permitted to utilize the cash method for bookkeeping and in turn may encounter a benefit in income tax. Since our site does not give any information regarding the income tax, you should look for tax advice from a financial professional such as CA or CMA.
Treatments of Revenues and Expenses under Accrual Method of Bookkeeping
Revenues and Receivables
As per the accrual method of bookkeeping, revenues are to be recorded in the accounting period in which they occur irrespective of whether they are realized in cash or not. However, the recording period can be different from the period in which the actual cash is realized.
Expenses and Payables
According to the accrual method of bookkeeping, the expense is recorded in the income and expenditure account in the period in which they occur with the revenues. In case if you cannot determine the period to which the expense is related then such expense shall be recorded when the actual benefits are realized. Moreover, in the accrual method of bookkeeping the cash payment is not a factor to determine the accounting period.